Leading QC owed no duty of care to participators
In a recent case David McClean and Others v Andrew Thornhill QC [2022] EWHC 457 (Ch), the High Court decided that a leading QC did not owe a duty of care to participators who lost £40m in a failed film tax avoidance scheme upon which he had provided counsel’s opinion.
The facts
The claimants were members of one or more of three limited liability partnerships (“LLPs”), formed for the purpose of participation in the distribution of films. Participation in the LLPs was marketed to potential investors on the basis that they would be entitled to tax relief against their income or capital gains for trading losses that the LLPs were anticipated to make (the “Tax Benefits”).
The three LLPs were Scotts Atlantic Distributors LLP (“SAD1”); The Second Scotts Atlantic Distributors LLP (“SAD2”); and The Third Scotts Atlantic Distributors LLP (“SAD3”).
SAD1 opened for subscriptions on 24 January 2003 and closed on 4 April 2003. SAD2 opened for subscriptions on 27 October 2003 and closed on 4 April 2004. SAD3 opened for subscriptions on 27 October 2003 and closed on 5 April 2004.
The three Schemes were promoted by Scotts Private Client Services Limited, (“Scotts”).
The defendant, Andrew Thornhill QC (“Mr Thornhill”) was and is an eminent and experienced barrister specialising in tax. He was engaged to provide advice on the tax consequences of the Schemes to Scotts (in the case of SAD1) and to Scotts and the LLP (in the case of SAD2 and SAD3).
Mr Thornhill provided various opinions, including an opinion dated 28 January 2003 in relation to SAD1 (the “SAD1 Opinion”) a short form opinion dated 20 October 2003 in relation to SAD2 and SAD3 (the “SAD2/3 Short-form Opinion”) and a long form opinion dated 27 February 2004 in relation to SAD2 and SAD3, in materially similar terms to the SAD1 Opinion (the “SAD2/3 Long-form Opinion”).
The schemes were promoted to investors via Information Memoranda (IM) which explained the tax consequences of the schemes, based on Mr Thornhill’s opinions. At no time did Mr Thornhill directly engage with any of the claimants.
The schemes failed with HMRC refusing to allow the tax reliefs claimed. The claimants settled with HMRC and then sought to claim £40m from Mr Thornhill on the grounds of negligence, i.e. he was in breach of a duty of care owed to them in providing the opinions and in endorsing the IMs.
In the High Court
The High Court dismissed the claims. In the Court’s view, Mr. Thornhill owed no duty of care to the claimant investors. The IM clearly advised that potential investors must consult their own tax advisers on the tax aspects of the schemes and that no investor could subscribe to the schemes without first warranting that they had relied only on the advice of, or had only consulted with, their own professional advisers.
In the Court’s judgement, the claimants were not Mr. Thornhill’s clients. His client was the scheme promoter, Scots. As a result, the claimants could not reasonably rely on Mr. Thornhill’s advice without making their own independent inquiry and Mr Thornhill could not reasonably foresee that they would rely on his opinion without taking independent advice.
The Court said:
‘Mr Thornhill was undoubtedly one of the leading tax QCs in the country at the time he advised. He accepted that he knew that to be the case. He was not held out (either by himself or by Scotts) as the leading tax expert. It is irrelevant whether, as many of the claimants say, he was described to them by their own advisers as the “top” or the “very best” tax barrister. That is not information which he could have reasonably been aware of. Nevertheless, I accept that he would have appreciated that, given his status as one of the leading tax QCs, his advice was likely to carry more weight.
It does not follow, however, that he should have reasonably foreseen that investors would rely on his opinion without consulting their own tax adviser as they were recommended to do, and as they warranted they had done, in the IM and subscription agreement. Even if he had been the “top” barrister, it is a nonsense to suggest that because he was the best, there would be no point in a potential investor getting their own advice. There were plenty of advisers (barristers, solicitors and financial advisers) who specialised in tax schemes such as the Schemes, and who could have provided investors with their own independent advice. Any such adviser would additionally have the benefit of Mr Thornhill’s opinion – not so they could rely on his advice, but so that they had the benefit of seeing what he had advised when they came to give their own advice. This is what I understood Mr Thornhill to mean when he said that he expected that his advice would assist potential investors’ own advisers. That acknowledgment by him is not to be equated with an acknowledgment that he believed investors or their advisers would rely on his advice.
The fact that Mr Thornhill’s advice (in particular as to whether the LLP was trading) was given in unequivocal terms, while relevant to the question of breach, has no relevance to the reasonableness of potential investors ignoring the recommendation and warranty in the IM and subscription agreement as them consulting their own tax advisers.’
The Court also find that, even if Mr. Thornhill did owe the claimants a duty of care he had not breached that duty.
‘That was not, however, the role expected of Mr Thornhill, even if he owed a duty of care to the claimants in respect of the advice he gave. The claimants were not his clients. In circumstances where no advance clearance from the Revenue could be obtained, the promoters of the Scheme sought the view of an eminent tax QC on the question whether the Scheme would achieve the Tax Benefits. That was what Mr Thornhill did. The nature and content of an appropriate warning by an adviser to their client is fact specific, and will depend on matters such as the terms of the instructions and the adviser’s knowledge of the client’s circumstances, sophistication and existing understanding of the issues. Mr Thornhill would have been aware, for example, that his actual clients, Scotts, were themselves highly sophisticated and likely to have been fully aware from their experience in promoting tax avoidance schemes of the issues to which they gave rise, and the risks associated with them. In contrast, not only were the investors not Mr Thornhill’s clients, but he knew nothing about their individual circumstances, other than that they were likely to be high net worth individuals and that they had been warned to take (and warranted that they relied only on) their own advice.’
It will be interesting, given the large sums involved, to see whether this case goes further. In the meantime, the case will no doubt act as a discouragement to the large number of investors who feel aggrieved that they have been mis-sold tax schemes.